Valaris Limited — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021. Valaris provides offshore contract drilling services through floater and jackup fleets and has a 50% interest in the Saudi Aramco Rowan Offshore Drilling Company (ARO). The company emerged from Chapter 11 on April 30, 2021 and adopted fresh start accounting; accordingly, Successor and Predecessor results are not directly comparable.
Financial performance and position
- Third-quarter revenue: $326.7 million, up 15% from $285.3 million in the 2020 quarter. Management attributed the increase mainly to more days under contract and higher day rates on certain rigs.
- Operating result: Operating income was $3.4 million, versus an operating loss of $94.4 million. The 2020 comparison included $118.1 million of loss-of-hire insurance recoveries, while depreciation and corporate costs were lower in 2021, partly reflecting fresh start accounting and prior restructuring.
- Net result: Net loss was $52.8 million; net loss attributable to Valaris was $54.5 million, or $0.73 per share. Income tax expense was $53.3 million, including $39.2 million of discrete tax expense primarily tied to prior-year tax positions.
- Operating costs and margin: Contract drilling expense was $274.3 million, down 11% year over year, and depreciation was $24.4 million, down 80%. Third-quarter operating margin was approximately 1%.
- Cash flow: Successor cash used in operating activities was $19.0 million for the five months from May 1 through September 30; capital expenditures were $23.7 million. The filing does not provide a separate third-quarter cash-flow figure.
- Liquidity: At September 30, cash and cash equivalents were $620.8 million, restricted cash was $33.9 million, working capital was $800.7 million, and the current ratio was 2.9. Total current assets were $1.23 billion against current liabilities of $426.8 million.
- Debt and equity: Long-term debt was $545.1 million carrying value, consisting of the $550 million principal amount of secured First Lien Notes due 2028. Shareholders’ equity was $1.04 billion. The notes offer interest-payment choices of 8.25% cash, 10.25% split equally between cash and payment-in-kind, or 12% payment-in-kind.
Changes, operations, and outlook
- Chapter 11 restructuring eliminated approximately $7.1 billion of debt. The company issued $550 million of First Lien Notes; the filing describes a $520 million capital injection in its restructuring overview. Fresh start accounting substantially reset asset values and depreciation, limiting comparison with historical financial statements.
- Third-quarter floater utilization was 28%, versus 11% in the prior-year quarter; average day rate was approximately $190,000. Jackup utilization was 57%, versus 50%, and average day rate was approximately $96,000. Company-wide utilization was 56%, versus 45%.
- Backlog was $2.3 billion as of October 27, 2021, versus $1.0 billion at December 31, 2020; this excludes ARO backlog. ARO backlog was $846.1 million, versus $347.5 million. Backlog includes future contract work and may decline through revenue realization or cancellations.
- Management reported improving offshore contracting and tendering activity in 2021, particularly for floaters, but cautioned that the recovery and oil-price improvement may not be sustained. COVID-19, customer spending, rig supply, contract awards and cancellations remain material uncertainties.
- Management expected 2021 capital expenditures of $62 million to $67 million, with $32.4 million incurred through the first three quarters. Capital expenditures are expected to increase in 2022, with a significant portion expected to be reimbursed by customers. Reactivations may raise future spending.
- In October 2021, Valaris sold VALARIS 142 and VALARIS 22; management expected to recognize a combined pretax gain of approximately $17 million in the fourth quarter. The company also has options, not obligations, to take delivery of two newbuild drillships by December 31, 2023, at estimated prices of $119.1 million and $218.3 million, respectively.
Risks and contingencies
- Offshore drilling demand, utilization and day rates are cyclical and exposed to oil-price volatility, customer capital-spending decisions, COVID-19 disruptions, excess rig supply, and contract delays or cancellations.
- Valaris may be required to contribute capital to ARO’s newbuild program if ARO lacks operating cash or third-party financing. The stated maximum aggregate contribution is up to $1.25 billion from each partner, subject to reductions based on rig costs.
- Outstanding letters of credit totaled $151.1 million, with $31.4 million of collateral deposits. The company also has substantial tax exposures, including a $17.6 million liability for unrecognized tax benefits related to Australian assessments.
- The filing discusses an Indonesian well-control investigation and Brazilian environmental assessments. Management did not expect ordinary-course claims to have a material adverse effect, but the ultimate outcomes are uncertain.
- Other risks include possible asset impairments, pension obligations, foreign-exchange movements, reliance on subsidiary cash distributions to service debt, and covenants restricting debt, distributions, investments and asset sales.
Investor verification priorities
- Verify the effect of fresh start accounting and use care comparing Successor results with Predecessor periods; the third-quarter comparison is not like-for-like.
- Track cash burn, available liquidity, capital spending and the selected cash-versus-payment-in-kind interest option on the First Lien Notes.
- Confirm conversion of announced contract awards into firm work, and monitor backlog, utilization and day rates by rig type.
- Assess potential ARO funding needs, collectability and timing of its shareholder notes, and whether ARO makes cash distributions.
- Monitor tax assessments, legal and environmental matters, rig sales, and decisions concerning reactivation or the two optional newbuild drillships.